How are private mortgage insurance (PMI) vs second mortgage compared?


Private mortgage insurance (PMI) vs. second mortgage options are often compared when taking a first mortgage and you put less than 20% down payment. People often used combo loans (also called piggybacks) to avoid paying PMI. A combo loan is one of the 80/20, 80/15/5 or 80/10/10 plans with which a borrower would take a first mortgage of 80%, make a down payment of 0%, 5%, or 10% and take a second mortgage to compensate the little down payment and avoid paying PMI.

Private Mortgage Insurance (PMI) vs. Second Mortgage

Piggyback loans with second mortgage were often preferred over a first mortgage with PMI for two main reasons:

  1. Second mortgage interest is tax deductible while PMI was not.
  2. Often, monthly payments with a combo loan using second mortgage were lower than first mortgage and PMI payments.

However, nowadays, not always combo loan payments are smaller than first mortgage carrying PMI, and also PMI can be dropped once 20% equity is reached. At the same time a second mortgage has to be carried around until amortized or refinanced.

Another reason for second mortgage loans losing popularity vs. private mortgage insurance is that as of January 1, 2007, PMI on loans originated after that date will be tax-deductible. It is said that PMI tax deductibility will end on December 31, 2007, but PMI tax deduction has been extended with three additional years through 2010. Only homebuyers with family income less than $100,000 are entitled to 100% PMI tax deduction. Limited PMI deductibility applies to households with income greater than that.

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